# acct ch 21(52-60)

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### \$94,125 \$90,000 +(495k/10 *1/12) =

52. On December 1, 2011, Goetz Corporation leased office space for 10 years at a monthly rental of \$90,000. On that date Perez paid the landlord the following amounts:
Rent deposit \$ 90,000
First month's rent 90,000
Last month's rent 90,000
Installation of new walls and offices 495,000
total: \$765,000

The entire amount of \$765,000 was charged to rent expense in 2011. What amount should Goetz have charged to expense for the year ended December 31, 2011?

### int exp of \$53,681 and depr. exp of \$44,734. 671,008 × .08 = \$53,681, \$671,008 ÷ 15 = 44,734.

53. On January 1, 2011, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of \$100,000 at the end of each year for ten years with title to pass to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of \$671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2011

### \$488,236 (3mill/6.1446)

54. On January 1, 2011, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.

(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is \$3,000,000; however, the book value to Holt is \$2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes \$10,000 of executory costs related to taxes on the property.

54. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.)

### \$498,237 (488,236 + \$10,000)

55. On January 1, 2011, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.

(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is \$3,000,000; however, the book value to Holt is \$2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes \$10,000 of executory costs related to taxes on the property.

55. What is the amount of the total annual lease payment?

### Sales-type lease

56. On January 1, 2011, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.

(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is \$3,000,000; however, the book value to Holt is \$2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes \$10,000 of executory costs related to taxes on the property.

56. From the lessee's viewpoint, what type of lease exists in this case?

### Direct-financing lease

On January 1, 2011, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.

(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is \$3,000,000; however, the book value to Holt is \$2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes \$10,000 of executory costs related to taxes on the property.

57. From the lessor's viewpoint, what type of lease is involved?

### \$300,000. (3,000,000 ÷ 10 )

On January 1, 2011, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.

(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is \$3,000,000; however, the book value to Holt is \$2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes \$10,000 of executory costs related to taxes on the property

58. Yancey, Inc. would record depreciation expense on this storage building in 2011 of (Rounded to the nearest dollar.)

### Capital lease (8/10 = .8 > 75% of economic life)

On January 1, 2011, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.

(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is \$3,000,000; however, the book value to Holt is \$2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes \$10,000 of executory costs related to taxes on the property.

59. If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee?

### \$434,366. (\$102,000 - \$15,000) × 4.99271

60. Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of \$102,000 at the beginning of each year, including \$15,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at

Example: